145 STUDY UNIT FIVE COST ACCUMULATION SYSTEMS (20 pages of outine) 5:4 Job-Onder Costing ee cece 148 5.2 Process Costing 2 148 5.3 Actvity-Based Costing 155 54 Life-Cycle Costing SG ees 55. Essay Questions wi : 177 This study unit is the second of four on cost management. The relative weight assigned to this major topic in Part 1 of the exam is 20%. The four study units are ‘Study Unit 4: Cost Management Concepts ‘Study Unit 5: Cost Accumulation Systems ‘Study Unit 6; Cost Allocation Techniques ‘Study Unit 7: Operational Efficiency and Business Process Performance 5.1 JOB-ORDER COSTING 1. Use of Job-Order Costing a. _Job-order costing is concerned with accumulating costs by specific job. 1) This method is appropriate when producing products with individual characteristics (e.g., yachts), or when identifiable groupings are possible (e.9., jewelry). Units (jobs) should be dissimilar enough to warrant the special record keeping required by job-order costing. Products are usually custom made for a specific customer. 2, Steps in Job-Order Costing a. The first step in the process is the receipt of a sales order from a customer requesting @ product or special group of products. b. The sales order is approved and a production order is issued. ©. Costs are recorded by classification, such as direct materials, direct labor, and manufacturing overhead, on a job cost sheet (may be manual or electronic), which is specifically prepared for each job. 1) The physical inputs required for the production process are obtained from suppliers. The journal entry to record the acquisition of inventory would be Raw materiats SxKK ‘Accounts payablo SKK 2) Production commences and three “documents” feed cost amounts into the costing system: a) Materials requisition forms request direct materials to be pulled from the warehouse and sent to the production line. Work-in-process ~ Job 1015 00 Raw materials SOK b) Time tickets track the direct labor that workers expend on various jobs. Work-in-process ~ Job 1015 XK ‘Wages payable SX 6) These two major components of product cost are charged to work-in- process (an inventory account) using the actual amounts incurred.146 SUS: Cost Accumulation Systems 3) Under job-order costing, the third component, manufacturing overhead, is charged using an estimated rate. a) The application of an estimated overhead rate is necessary under job-order costing because the outputs are customized and the processes vary from period to period. b) As indirect costs are paid throughout the year, they are collected in the ‘manufacturing overhead control account. ji) Note that work-in-process is not affected when actual overhead costs are incurred, ii) The debits are made to a manufacturing overhead control account, not work-in-process. Manufacturing overhead control 910K Property taxes payable SH Manufacturing overhead control OK Prepaid insurance 00 ‘Manufacturing overhead control B90 ‘Accumulated depreciation — factory equipment 90K ©) Overhead costs are applied to (“absorbed” by) each job based on a predetermined overhead application rate for the year (such as $5 per direct labor hour, or machine hour, etc., or based on an activity-based costing system). i) Atthe beginning of the year, an estimate is made of the total amount that will be spent for manufacturing overhead during that year. This total is divided by the allocation base, such as direct labor hours or machine hours, to arrive at the application rate. ili) The amount applied equals the number of units of the allocation base used during the period times the application rate. ‘* The credit is to manufacturing overhead applied, a contra- account for manufacturing overhead control Workin process — Job 1015 SXXX Manufacturing overhead applied 00 iv) By tracking the amounts applied to the various jobs in a separate account, the actual amounts spent on overhead are preserved in the balance of the overhead control account. @ _ Inaddition, the firm can determine at any time how precise its estimate of overhead costs for the period was by comparing the balances in the two accounts. The closer they are (in absolute value terms), the better the estimate was. d) At the end of the period, the overhead control and applied accounts are netted. i) Ifthe result is a credit, overhead was overapplied for the period. if the result is a debit, overhead was underapplied. Ifthe variance is immaterial, it can be closed directly to cost of goods sold. * Ifthe variance is material, it should be allocated based on the relative values of work-in-process, finished goods, and cost of goods sold,SU 5: Cost Accumulation Systems 147 4) The amounts from the input documents are accumulated on job-cost sheets. These serve as a subsidiary ledger page for each job. a) The total of all job-cost sheets for jobs in progress will equal the balance in the general ledger work-in-process inventory account. b) Once the job is completed, but before it is delivered to the customer, the job cost sheet serves as the subsidiary ledger for the finished goods inventory account d. When a job order is completed, all the costs are transferred to finished goods, Finished goods KH Work in-process ~ Job 1015 $X,900 ©. When the output is sold, the appropriate portion of the cost is transferred to cost of ‘goods sold. Cost of goods sold XK HHK Finished goods SKK 3, Job-Order Cost Flow Diagram Raw Materials Purchase | Usage of > of materials | direct materials —] Workin Process Finished Goods L—> cvoctmatstais [rocess” ——> process Wages Payabie Sampled completod —— fame aeats ——> "areeicber Application of [overhead rate Manufacturing Overhead Applied Manufacturing Overhead Control Usage of Application of imemaref Indrect overhead rate material > Incurtence of Indirect labor Recognition —— offactory ‘operating costs Figure 5-1 CMA candidates will be expected to understand the proper accounting procedure for normal and abnormal ‘spoilage under both job-ordor costing and process costing. Injob-order costing, normal spollage is treated 28 a product cost while abnormal spoilage is treated as a period cost. Ii important to understand not only that they ere treated cifferently, bul why. When answering questions pertaining to spoilage, pay attention to the question stem, what systom is being used, and whether the product can be sold or not.